It's the law, stupid!

Regulation worthy of 'Yes Minister'

Tom Collins

Mon 09 Oct 2006

I was going to write about superannuation and how the current super regulatory framework and the Australian Prudential Regulation Authority's (APRA) interpretation of it are on a collision course with the way the Federal Government wants to take super and where current practices and consumers needs are taking it.

And I still will. But first, did you read that doctors, dentists and vets are becoming mortgage brokers so they can provide their clients with personal loans and credit cards?

Given debt products are not covered by financial services reform, they do not need to be licensed, they do not need to provide a statement of advice (SOA), and they do not need to disclose commissions. Nor do they need to declare any kickbacks, soft dollar arrangements or any conflicts of interests.

But this lack of regulation and disclosure is probably okay, as we all know doctors, dentists and vets are honest, upright and professional. They have all withstood the various inducements and handouts of the pharmaceutical companies. So why should we worry?

The above, and what I originally was going to write this article about, and still am, unfortunately reaffirms for me how utterly stupid the current regulation of financial services is in Australia. On one hand you can go to gaol if you're a day late with your SOA, but at the same time a doctor can earn a hefty, non-disclosed commission arranging a personal loan for their patient to get a boob job - and they probably get a fully paid trip to a conference in the Bahamas as well.

But back to super. In recent years, the Government has encouraged member choice in superannuation, both in investments and in fund.

The recent budget changes will also usher in more chance for choice in post-retirement strategies for members. Ah, but the law and especially APRA are frustrating, even denying, members the ability to exercise some of these choices.

APRA loves waving Section 52 of the SIS Act at everyone, especially through its Superannuation Circular No. II.D.1 Managing Investments and Investment  Choice, issued in March this year.

In true Yes Minister style the circular is about frustrating member investment choice and challenging and demeaning the role of the financial planner. I could go on, but as I'm on the trustee board of one superannuation fund and heavily involved with a few others, I don't think it would be that judicious.

However, more importantly, I really want to argue how the current superannuation law is not really relevant today, and especially in the future. To compound this, you have recently had the number of trustees of APRA-regulated super funds reduced from about 1300 to just over 300. Not only does this mean less choice and less competition, but, in my humble view, it has significantly increased the systemic risk of there being a major failure of a super fund.

The tension between government policy and members' needs goes beyond the regulators (APRA, ASIC and the Australian Taxation Office). It goes to a lot of the established players in the industry. The large established players,  and this includes the industry funds, want an industry that's concentrated around a small number of very large players - this entrenches their position.

Stuff choice and competition! Ever since we moved away from defined benefit funds to defined contribution or accumulation funds, I having been moving to the view that we don't need our current complex trustee, pooled monies structure for super.

Each member has their own account, their own investment strategy and their benefit is the balance of their account. Isn't super now just an investment account with some rules around tax concessions if you adhere to some benefit payment rules?

If this is the case, why persist with complex structures that add significantly to costs? If I believed in conspiracy theories, I could argue that it is because the current structure benefits all the key players (regulators, trustees, master trust operators, fund managers, consultants and professional advisers) except the most important one - the member.

I'd also argue the current structure doesn't suit financial planners either. The super changes announced in the May budget will provide members over age 60 with a dazzling array of opportunities to manage their financial situation.

That is if the regulators and vested interests don't stifle the opportunities by trying to silo super from the rest of a member's financial circumstances. These opportunities not only include withdrawal strategies, but with contributions, any non-super income, tax and social security implications, assets within super and outside of it, and how the home fits in.

Some in the industry are already wondering what we should do if members abuse the new opportunities, for example, waste their super. Who cares, do we have to be the paternalistic guardians of members' money? Financial planners will only be able to fully exploit all of these opportunities if super can be better and more simply regulated - as are selfmanaged super funds.

Some financial planners are also worried to what may happed to an investment strategy they have put in place for a client/member and they, the client, then goes and accesses some of their money. Once again, who cares? Whose money is it? I don't think the Government would have brought in the super changes if they didn't want members to have more choice in how they structure their post-retirement financial arrangements.

Also, the Government wants super to be efficient and less expensive. But the Government will not get these outcomes unless it also tackles the unnecessarily complex regulatory structure of super and streamlines the regulatory arrangements. As financial planners, you should be telling the Government there are many worthwhile strategies you can develop for your clients - worthwhile for them and for society. But also tell them you are being frustrated not only by the law but by the regulators with their own agendas.

I really wonder who runs the superannuation policy in this country. Maybe it is Sir Humphrey Appleby.